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(Bloomberg) – A big week for global markets is off to a bad start as stocks plunge around the world and safe-haven deals erupt. To blame everything, from the woes of the China Evergrande group and collapsing iron ore prices to fears about the US debt ceiling.
The end of the game for the creditors of the Chinese real estate giant has come just as traders are on high alert ahead of the Federal Reserve meeting this week.
The Stoxx Europe 600 Index fell 1.9% on Monday, on track for the biggest drop in two months, as S&P 500 futures test key 50-day support levels.
“The markets take a very narrow path where the margin for error is very low,” said Colin Finlayson, investment manager at Aegon Asset Management in Edinburgh, which is reducing a short position in bonds. “Any surprise – whether it comes from China, the spread of the delta variant, or a communication from the FOMC – will be disproportionate,” he said.
Adding to the bearish tone on Wall Street, Morgan Stanley strategists led by Michael Wilson have warned clients that the S&P 500 could suffer a 20% correction in the event of bad news about earnings revisions and economic growth.
Here is an overview of some of the main issues facing investors and where they are positioned:
China Evergrande
Anguish over the world’s most indebted developer is spreading as senior Chinese politicians remain silent on whether the government will step in to prevent a disorderly collapse. It sparked the biggest sell-off in Hong Kong real estate stocks in over a year and brought down everything from banks to Ping An Insurance Group Co. and high-yield dollar debt.
Interest payments on two Evergrande bonds fall due Thursday, a key test of whether the company will continue to meet its obligations to debt holders even if it falls behind on payments to banks, suppliers and debt holders. onshore investment products in China.
Iron-ore
The epic iron ore sell-off continued amid a rout that brought prices below $ 100 a tonne. Singapore futures fell to $ 95 on Monday as pressure from China to curb steel production hammers demand. Iron ore has more than halved since it hit a record high in May, with some market participants saying a drop to $ 70 is a possibility.
Yield curve
For Treasury bears – the majority of Wall Street – this week’s Fed meeting represents one of the last potential triggers this year for a decisive break in yields. Traders expect officials to hint at a plan to curb bond buying and are prepared for a change in the central bank’s new forecast for its benchmark rate.
Primary traders polled by Bloomberg News on average expect 10-year yields to be more than 30 basis points higher by the end of the year. Still, the yield curve has flattened the most since the early days of the pandemic, suggesting that there still exists the possibility of a conciliatory surprise.
Emerging Markets
Hedge funds are also increasingly bearish in emerging market equities – seen by many as particularly sensitive to a taper tantrum from the Fed. According to data from the Commodity Futures Trading Commission, leveraged fund positions on futures contracts linked to the MSCI Emerging Markets Index turned net short for the first time in over a year.
The gauge of developing-market equities fell 8% this quarter – underperforming its developed-market peers by about 10 percentage points – also weighed down by Beijing’s crackdown on private companies.
American equities
The S&P 500 Index has fallen for eight of the last 10 sessions, but with a fairly modest drop of just over 2%. The benchmark US equities index is around its 50-day moving average, which provided solid support for much of the year. The key technical level has become a closely watched flashpoint as investors prepare for a key week to determine market direction through the end of the quarter.
(Adds Aegon listing, Morgan Stanley share call)
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